Persistence of Technological Leadership: Emerging Technologies and Incremental Innovation

Abstract

In a model of competitive innovation, I derive theoretical conditions for an entrant to displace the incumbent firm by innovating in an undeveloped, substitute (emerging) technology. The main result presents conditions on profitability and innovation speed that yield a Markov Perfect Equilibrium in which the entrant pursues the emerging technology, while the incumbent chooses to persist with the established technology and collect short‐run profits. Notably, this result does not require the entrant's superiority to the incumbent for innovation. Finally, when the model is calibrated to hard drive industry data, its predictions are consistent with the observed outcomes.